Friday, 2 May 2008

Parastatal Madness

Secretary to the Treasury, Evans Chibiliti disclosed earlier this week that a number of companies (Zamtel, Zesco etc) owe the Zambia Revenue Authority (ZRA) billions of Kwacha in unremitted taxes. Apparently ZRA has sufficient legal tools to compel defaulting clients to pay,but the situation is tricky because of " the strategic importance of the erring firms and institutions".The truth of course is that this is not entirely true. One only needs to peruse through the PAC report to see that most of the parastatals are actually owed a lot of money by the government, this is why they never pay taxes! Many of us have previously called for these parastatals to become independent, but reality is that incentives for government to act are very weak. Parastatals help governments to shift debt around! Mr Chibiliti calls this implementation of "various debt swap and cancellation initiatives".

Its not that the government has a poor command of economics or that it believes its own argument that "parastatals are crucial for national security", its just that it has weak incentives to make parastatals more independent. The government knows the right approach is to fully commercialise the firms and ultimate privatisation (with adequate regulation where necessary), but they fear that doing so would make them pay the debts back! In particular, fully commercialise / privatised parastals makes its very difficult for the sitting government to use them as engines for direct / indirect campaign during election time. For example, they can no longer get a Zamtel phone connected for free or get ZESCO to provide power for free etc! There are other disincentives of course, most notably incurring the wrath of laid off employees (see the ZAMTEL post), possibly culminating in an electoral defeat. Indeed in some cases the pressure from employees represents the greatest stumbling block for reform because they fear job losses! Although in the long run as the company expands it will be able to take on more employees and with better prospects.

13 comments:

Parastatals leech off each other, enjoying ‘free’ services since ultimately the taxpayer pays. Kenyans ones had got to a point where they didn’t pay for water, electricity, telephone, taxes, or fund pensions since they all owed them to ‘each other’. What needs to happen is for tem to get serious with each other i.e. the water one don’t supply water to any other who has not paid, same for electricity, the taxman withholds funds till their arrears are cleared, and pensions get the assets unless the company funds them

However, I would like to remind everyone that the biggest Japanese and Korean corporations in the world today once started off as parastatals and were heavily supported by the state.

Honda, Mitsubishi, Sony were all family companies that received massive government support because their sectors (vehicles, electronics) were considered strategic economic sectors and the government had the foresight to stimulate Japanese and Korean domestic companies.

They never thought of inviting over western corporations to set up strategic industries.

And Japan and Korea helped sectors more than companies. And what they really had the foresight to do was to make the support conditional to performance. That's what didn't happen in Africa or Latin America and that's what is missing in your view of the efficiency of protectionism.

The fact that there was competition between them and the fact that the assistance was more or less proportional to exports is why they didn't end up like the Zamtels and Gecamines of the world.

And what they really had the foresight to do was to make the support conditional to performance.

Well let's have that. In fact, let's have far more tracking of results of construction companies too.

This ties in with having a national registry of companies, so fraudsters and companies with debt can be weeded out, and at the same time, companies with excellent track records can be rewarded with government contracts, lower taxes or anything that rewards excellence.

The fact that there was competition between them and the fact that the assistance was more or less proportional to exports is why they didn't end up like the Zamtels and Gecamines of the world.

And what they really had the foresight to do was to make the support conditional to performance. Well let's have that. In fact, let's have far more tracking of results of construction companies too.

Yes, but it can't be an afterthought. See, the thing that absolutely boggles me in those debates between protectionists and free-marketers is both try to argue that only one way works and the other fails. Those two positions are simply stupid.It's far more interesting to debate the conditions that make either work.

This ties in with having a national registry of companies, so fraudsters and companies with debt can be weeded out, and at the same time, companies with excellent track records can be rewarded with government contracts, lower taxes or anything that rewards excellence.

In theory, if you have a credit tracking system, the companies with an excellent track record will be rewarded with cheaper loans by banks without the government doing anything.

Let's have a Kaizen (continuous improvement) campaign for businesses.

With what incentives ? I mean, why Toyota decided to continuously improve ? How did they measure the improvement ? How did the government measured their improvement ?

To come back to Korea and Japan, exports were used as a criteria because the ability to compete on the international markets depended on the quality/price ratio of the products. They knew there wasn't enough incentives in their protected markets ( Ha-Joon Chang for some reason didn't mention that it was the lesson Japan learned from Toyota's first attempt on the US market). I guess what I mean to say is that the criteria has to be something measurable. And it would be a lot more fun to debate this instead of the stupid ideological war on free markets and protectionism.

To come back to Korea and Japan, exports were used as a criteria because the ability to compete on the international markets depended on the quality/price ratio of the products.

That all happed after they decided that they wanted to turn to manufacturing of consumer goods. They learned the hard way, because for a very long time, saying something was 'made in Japan' or 'made in Korea' meant that it was of very low quality, as well as price.

They knew there wasn't enough incentives in their protected markets ( Ha-Joon Chang for some reason didn't mention that it was the lesson Japan learned from Toyota's first attempt on the US market).

And that's fine. There should be competition between parastatals, and between the suppliers to parastatals.

However, that is something very different from opening up the national economy to international competition or global competition.

I like professor Chang's example of the Italian football team playing against his daughter's football team.

Let's build industries and suppliers through domestic competition, not by throwing open the borders to heavily subsidized western corporations.

It is in the field of domestic and even in-house competition that Japan and Korea's examples should be studied and learned from.

And if you can get around to it, there is a link to "Life And Debt" on my website, or you can surf to it here:

That all happed after they decided that they wanted to turn to manufacturing of consumer goods. They learned the hard way, because for a very long time, saying something was 'made in Japan' or 'made in Korea' meant that it was of very low quality, as well as price.

I'm sure you understand what I meant.What I'm saying is that it's the export dependant subsidies that made Japanese products get to what they are now.From the 50's (the 60's for Korea), those companies were encouraged to compete on the world market and that is why they (along with local competition) they kept improving.

The problem with infant industries, contrary to children is that they do not automatically grow and will never voluntarily seek to be independent and self-reliant. They will arguing that they need the help, indefinetly. Just look at how angry is Boeing at the fact that Airbus got a US military contract, or how french cars manufacturers were angry when the french police bought some Ford Escorts etc..etc.. None of those companies are "infants" needing help and they're all very able to hold their ground abroad (also, all the foreign "winners" were manufacturing locally, so there's no job loss for either country).

What Japan and Korea did was to force those companies to go play outside and measure themselves to grown ups. And that's exactly what every other country that tried ISI failed to do.

As I said before, why aren't we wondering why 50 or 30 years of Import Substitution didn't create Toyotas and Samsung in Latin America or Africa ? Why did those all collapse when they suddenly had to face foreign competition (sometimes before) ?

That's exactly the kind of questions that are interesting to me. Why did Jamaica had to go to the IMF and go through structural adjustment instead of "look what the IMF did to Jamaica". Why I can buy Saporo, Red Stripe and Corona in the US and while African beers are nowhere to be found even if Breweries are by far the most succesful industrial entreprises on the continent ?

That's where you learn from Korea and Japan, by the fact that at the end, they were able to manage their protectionism in a way that doesn't create sclerosis. And not by denying the strong risks of sclerosis.

So I watched "Life and Debt".What brilliant revelation was I supposed to have again ?

Once again, I didn't learn anything that I didn't know about the general situation and as far as the details, there was quite a few things that didnt make much sense.

But in any case, once again, what am I, someone from the third world who lived in a country that went through a structural adjustment or two, suppose to learn from a documentary with a narrator explaining things to an American tourist ?

What did you think about the Chinese workers who were shipped into Jamaica's 'Free Trade Zone'?

I actually read about it years ago. And I'm glad I did, because the way it was described in the documentary didn't make sense at all. I mean the idea that the Chinese quasi-slaves were better paid is simply ridiculous.What do I think ? It's horrible for the chinese workers and for the jamaican workers.

But here's the question: how come that didn't happen in Mauritius or in Singapore ?

What did you think about the image of the dairy farmer who had to pour his day's milk down the drain, because heavily subsidized imported powdered milk was pricing him out of business?

Shit.Happens.No, honestly. It's sad for him and his workers. But what about the Jamaican consumers ? Are they happier because they buy cheaper milk ?

How honest do you think the 'free trade' concept was, and how helpful was it to Jamaica's economy?

Honest ? No idea.I mean you have the Jamaican government getting a loan for agricultural devellopment and as a condition lowering its tarriffs and cutting its subsidies.What did they do with the money ?Why did they take the loan knowing how subsidise American agriculture is ?Who is honest here ?The US sure isn't but Manley and his successors may have some explainning to do.

Helpful ? One has to look at the bigger picture.Whenever an economic decision is made, there are winner and loosers. And a documentary only showing the loosers won't certainly help anyone forming an opinion about how helpful it all was.Think about this, agrculture is 7% of Jamaica GDP and 80% of that is sugar, bananas, coffee, cocoa and spices. Why all that insistence on oignon, tomato and diary farmers ?Then about industry ? Tourism ? Financial services ? Did those benefit from Free trade ?

What do you think of the World Bank and Fischer's attitude toward policy and development?

Hmmm.. Attitude ? Well, certainly he shows the typical technocratic arrogance. But then again, it's not like Manley (and the other interviewes) is any better.I don't think Jamaica was made to do anything that didn't make sense except for limiting the education budget may be.I have a hard time understanding what's so damn shocking about the idea that the Jamaican Dollar was overvalued or about the idea that Jamaica's comparative advantage is not in agriculture.

”What needs to happen is for tem to get serious with each other i.e. the water one don’t supply water to any other who has not paid, same for electricity, the taxman withholds funds till their arrears are cleared, and pensions get the assets unless the company funds them” - Bankelele

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